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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

A policyholder is willing to pay up to Rs 12,000 for a one-year health cover but the insurer's premium is Rs 9,500. What is the policyholder's consumer surplus from buying it?

The consumer surplus is Rs 2,500, found by subtracting the premium actually paid (Rs 9,500) from the maximum the policyholder would be willing to pay (Rs 12,000). It measures the net benefit of the purchase over its price.

  1. ARs 2,500Correct
  2. BRs 9,500
  3. CRs 12,000
  4. DRs 21,500
  5. Zero, because insurance is not a physical good

Explanation

Consumer surplus is the maximum price a buyer is willing to pay minus the price actually paid. Here 12,000 - 9,500 = 2,500. Rs 9,500 is merely the amount paid, and Rs 12,000 is the total value placed on the cover.

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